EU carbon market reform deal: taking stock and moving forward

Last week the European Parliament adopted its position on the revision of the EU’s Emission Trading System (EU ETS) for the 2021-2030 period. Next week, EU environment ministers will try to reach an agreement on the reform deal. Time to take a fresh look at what is on the table, and what is at stake.

Ahead of the vote in the Parliament, close to 100.000 citizens called on policymakers to support a strengthened ETS that makes the polluters pay for their climate damages, while industry lobbied for more free pollution permits. In the end, a small majority of the house voted for extra free pollution permits and against deeper emission cuts, thereby backtracking from the Paris climate agreement. It is now in the hands of the EU environment ministers to strengthen the climate tool at their next meeting on 28 February.

On the minus side: more presents to big polluters despite huge windfall profits

A small majority of the Parliament voted against deeper emissions reductions and against a proposal to align the starting point with actual emissions that according to calculations would have significantly raised the carbon price, from EUR5 per tonne today to EUR40 by 2030. Instead, polluters will continue to receive over-generous free permits for their pollution, even though this has led to a situation in which industry has profited from its pollution, by over €25 billion between 2008 and 2015.

Backtracking from earlier compromises, lawmakers missed out on strengthening the polluter pays principle through the introduction of a carbon tariff on cement imports – the so-called border adjustment measure and an end to free pollution permits for the cement sector, which has been able to make over €5 billion windfall profits under the current rules. In recent weeks, this measure has gained increasing support from experts, innovative industry representatives, investors, and lately even from industry giants like ArcelorMittal. In the end, the Parliament adopted a review clause to assess the introduction of these measures in the near future, so it still holds the potential for addressing the problem of overallocation to energy intensive industry.

On the plus side: cancellation of surplus allowances and more money for innovation

 Although a small majority of the Parliament voted against aligning the EU ETS with the Paris Agreement goals, an overwhelming majority supported the cancellation of up to 1 billion surplus emission allowances and a more rapid withdrawal of the surplus into the Market Stability Reserve (MSR). Under the current text, member states also have the option to cancel allowances from 2019 onwards which would eventually allow a “coalition of the willing” to increase the EU’s climate ambition as part of the upcoming global stock-takes. These improvements were impossible two years ago, when the MSR was under negotiation and certain political groups had defined any kind of cancellation as a red line.

A beefed-up innovation fund will make available over €10 billion to help European industries decarbonise through research and innovation. Further good news are some of the changes adopted to the modernization fund to exclude the financing of new coal power plants and the creation of a Just Transition Fund to support workers in the transition towards a low-carbon society.

Other positive elements are the inclusion of shipping in the EU ETS in the absence of climate action at the global level and strengthened rules for the aviation sector. Both sectors have flown under the radar for far too long, despite an increase in emissions in these sectors.

Moving forward and beyond

The improvements adopted by the European Parliament alone will not fix Europe’s broken carbon market. Solutions will need to be found in the coming years in the form of complementary measures at the national and EU level to enable the low-carbon transition of Europe’s industrial sectors.

A “coalition of the willing” group of countries who are ready to go beyond the reform proposal can now voluntarily cancel emission allowances unilaterally. So far Sweden has implemented a law to buy and cancel surplus allowances, but the measure has gathered interest from other Member States as well, possibly feeding into the five-yearly global stock-takes starting in 2018.

A likely result of a suboptimal non-functioning EU ETS is the introduction of complementary EU measures to tackle the decarbonisation of the EU’s industry sectors. The changes to the EU ETS that the Parliament supported, including the removal of up to 1 billion surplus, will not deliver a high enough carbon price to drive decarbonisation in Europe. Border measures will be something to discuss as will be performance standards for climate-friendly materials, for instance.

The EU environment ministers will discuss the ETS proposal with the aim to reach a common position at their next meeting on 28 February. Following this, the European Parliament and EU Member States will start their negotiations on the file in order to reach a final agreement. There is still time for lawmakers to choose: between a system that continues to reward polluters at the expense of the climate or one that can drive European industries towards a low carbon future.

by Dr. Agnes Brandt